The impact of climate change on contracts and the law

Writing this article, as Jeremy Glover is, just before COP 26 means that it must start and end with the obvious disclaimer that everyone should look out for details of any agreements that are made at the end of the Glasgow summit. More particularly, everyone should look for the small print and finer details of any agreements made and lauded by the politicians in attendance. What do they really mean, in practice? That is not to say that that there will not be progress. 

The Paris Agreement, adopted on 12 December 2015 and ratified by the UK on 17 November 2016, provided that countries should hold the increase in global average temperature to: “well below 2ºC above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5ºC above pre-industrial levels.” The UK then went further than that. In order to reflect the change in temperature target set by the Paris Agreement, the Climate Change Act 2008 was amended in 2019 to read: “(1) It is the duty of the Secretary of State to ensure that the net UK carbon account for the year 2050 is at least 100% lower than the 1990 baseline.” 

It is, therefore, likely that further primary and secondary legislation will follow COP 26. 

The role of the UK Government 

The UK Government is, of course, a major employer or client within the construction industry and it may1 be that the government will take the lead in making changes to construction contracts and practice. An obvious source of pressure to achieve net zero and similar environmental objectives could come from investors requiring that their capital is invested in a sustainable way. Whilst there is no UK legislation currently requiring companies to fall within certain carbon emission limits, something the forthcoming Environment Bill will not really change, the comments made by the then UK construction minister on 21 July 2020, Ann-Marie Trevelyan2 suggest one way forward: 

“It’s likely that, going forward, government tenders will place greater emphasis on climate change. We have made it very clear that wholelife value rather than upfront cost is key, and carbon impact is a critical element in assessing broader value.” 

The minister listed three government actions to ensure contractors commit to reducing carbon contributions: 

• A “carbon exclusion measure”, or warning that companies without net-zero plans, or not committed to net-zero by 2050, will be barred from bidding for public sector work. The policy will apply to contracts above £5m. 
• National Procurement Policy statement: public sector buyers must consider how their procurement can tackle climate change and reduce waste. 
• A requirement for central government departments to “expressly evaluate environmental, social and economic benefits” during the procurement process. 

These actions came into force at the beginning of October 2021 and all companies bidding for government contracts worth more than £5m a year must commit to achieving net zero emissions by 2050.

This demonstrates an area where contracts will continue to evolve – pre-tender qualification. Known as green baseline clauses3, companies may, by way of example, need to identify their carbon footprint with those not meeting current standards being excluded from tendering. Only those who can demonstrate a real commitment to net-zero and/or any new government requirements can bid for work. This is not the only way. 

Contractual commitments 

In time, there are likely to be new contractual obligations which go beyond a simple requirement similar to that which can be found in subclause 4.18 of the 2017 FIDIC Red Book that the contractor will take all necessary measures to: (a) protect the environment (both on and off the Site); (b) comply with the environmental impact statement for the Works (if any); and (c) limit damage and nuisance to people and property resulting from pollution, noise and other results of the contractor’s operations and/or activities. 

The obligation continues that the contractor shall ensure that emissions, surface discharges, effluent and any other pollutants from their activities shall exceed neither the values indicated in the Specification, nor those prescribed by applicable laws. Note the reference to the Specification. The Specification or Employer’s Requirements are another area where firmer environmental requirements might be imposed. 

Recently, I, along with colleagues at Fenwick Elliott, have provided pro bono support to the Chancery Lane Project4 (a project aligned with and supporting the achievement of the UN Sustainable Development Goals relating to climate action and the UK’s emissions reduction target, enshrined in law, to reach net zero by 2050). The headline on their website reads: “Start using new contractual clauses that help fight climate change.” 

One thing we all noted was the potentially onerous reporting requirements. Perhaps this is an inevitable consequence of the need to comply with new requirements. The contractor will need to comply with obligations of measurement, monitoring, management, mitigation, prediction and then reporting. These might prove to be a burden to all parties to the contract. The contractor, in the first place, and then the employer, contract administrator, or perhaps the Dispute Board, who has to police compliance with reporting and then the accuracy of the reporting. This raises the possibility of a green termination clause, a failure to meet the required standards as well as the creation of a new role, a third-party assessor to provide independent audits to check compliance. 

In the UK, the Government’s Construction Playbook, released in December 2020, notes in the section headed, Build Back Greener, that: 

“All contracting authorities should set out strategies and plans for achieving net zero GHG emissions by or ahead of 2050 for their entire estate/ infrastructure portfolio. These should be aligned under an overarching sustainability framework, and systems and processes should be in place to ensure their projects and programmes deliver on the targets set.” 

In time, contractual emissions targets may be introduced into contracts, in line with the march to a net zero obligation. The emissions will relate not only to the construction process itself but may need to cover whole-life emissions for a project, something for the party tasked with the engineering or design obligation to consider. The sustainability of projects will become an increasingly relevant part of the overall design life requirements of every building. 

Proof that these requirements or targets have been met is likely to become another pre-condition to completion or takeover. In the UK, this will align with the UK Government Soft Landings approach to completion. With GSL, much of the focus is on functionality and effectiveness (meeting the needs of their occupiers with effective, productive working environments) and environmental factors (meeting government performance targets in energy efficiency, water usage and waste production). 

It is possible that liquidated or delay damages’ clauses may include sums based on an assessment of the remediation costs (a climate remediation fee) needed to repair a failure to meet sustainability requirements or climatic obligations. Or, equally, there could be bonuses for meeting specified standards. Another way that environmental obligations might ultimately be imposed on companies is through the courts. 

Caselaw 

On 26 May 2021, a district court in the Hague found that Shell: 

• Owed a duty of care to citizens to reduce its emissions; and 
• Had a climate policy but it was “not enough” to satisfy that duty, namely it was “not concrete” and was “full of conditions.” 

The court ordered: 

“Royal Dutch Shell, by means of its corporate policy, to reduce its CO2 emissions by 45% by 2030 with respect to the level of 2019 for the Shell group and the suppliers and customers of the group5.”

The case was brought jointly by several NGOs and more than 17,000 Dutch citizens, who alleged that Shell was threatening human rights (under the European Convention on Human Rights) by not reducing its emissions sufficiently. It is also one of a number where, typically, claims are brought on behalf of a large number of citizens by an NGO. The courts have found that the governments in question owed an obligation to take necessary measures against climate change and that they had failed this obligation. The obligation arose as a matter of fundamental human rights within national laws but also the European Convention on Human Rights. 

Similar cases are likely, and companies need to take care that they do not make extravagant promise about their green credentials. To “greenwash” is defined by the Cambridge dictionary as to: “make people believe that your company is doing more to protect the environment than it really is.” In December 2019, ClientEarth made a complaint to the UK NCP6 that BP’s global corporate advertising, “Keep Advancing” and “Possibilities Everywhere”, misled the public in the way that it presented BP’s low-carbon energy activities including their scale relative to the company’s fossil fuel extraction business. BP withdrew the adverts in February 2020 and the NCP did not pursue the complaint. However, again, similar cases are likely. 

Companies also need to consider carefully the extent of their obligations. If your organisation is based in the UK and has overseas subsidiaries which may face claims from claimants overseas, then the 12 February 2021 decision of the Supreme Court in Okpabi and Others v Royal Dutch Shell Plc and Another7 is of some importance. The case added to the growing body of case law concerning the use of a UK-domiciled parent company as an “anchor defendant” to obtain the jurisdiction of the English courts to hear claims brought against an overseas subsidiary. 

The Supreme Court considered the jurisdiction of the English courts to hear claims in tort brought against a UK domiciled parent company for liability arising from actions of its overseas subsidiary. The Supreme Court, in contrast to the lower courts, held that there was, in fact, a real issue to be tried, which meant that the requirements for jurisdiction were established and there would be a full trial. 

In a different forum, in September 2021, Petrofac entered into a plea agreement with the UK Serious Fraud Office and indicated that it will plead guilty to seven bribery offences under the 2010 Bribery Act over payments for contracts in the Middle East. It was also ordered to pay £77million. The charges related to bribes or offers made to agents between 2011 and 2017 and contracts awarded in the Middle East during the same period. 

Both cases provide a reminder that organisations with parent companies in the UK who have a degree of control or influence in the management of their subsidiaries (for example, monitoring compliances with company-wide policies) leave themselves directly open to either legal challenges from overseas claimants or action from the SFO. The global rise in activism surrounding environmental issues may see an increase in environmental legal actions against UK-domiciled parent companies in the English courts. 

If we are to work towards a net zero target in 2050, this cannot be achieved without considering the whole-life costs and carbon emissions of projects being built right now. Emissions reduction policies in the design and construction phase contribute to the overall lifecycle carbon footprint of the completed building. Design, construction, operation and maintenance need to be considered together if real progress is to be made. 

Conclusion 

So, of course, we await the outcome of COP 26. However, the majority of the those who work within the construction industry are already taking steps to address environmental concerns and work to a more sustainable future. Many have been doing so for some time. The result of COP 26 is likely to be a move to more regulation, both imposed by government and to be found within project requirements. 

And this will affect us all, whether client, contractor, funder, consultant or … lawyer. 

Previous article | Next article

• 1. Many would say “should” or “will”.
• 2. On 23 September 2021, Lee Rowley became the sixth construction minister in 2 years.
• 3. One potential baseline is the Greenhouse Gas Protocol Corporate Accounting and Reporting Standards
• 4. https://chancerylaneproject.org/
• 5. Shell said on 21 July 29021 that: “We agree urgent action is needed and we will accelerate our transition to net zero... But we will appeal because a court judgment, against a single company, is not effective. What is needed is clear, ambitious policies that will drive fundamental change across the whole energy system. Climate change is a challenge that requires both urgent action and an approach that is global, collaborative and encourages coordination between all parties.”
• 6. The UK National Contact Point (UK NCP) deals with complaints that the Organisation for Economic Co-operation and Development (OECD) guidelines have not been met.
• 7. [2021] UKSC 3